Fostering Your Child's Financial Literacy

Everyone knows that young people are pros at spending money; millions of dollars are spent annually on advertising aggressively directed towards them. They know how to use ATM machines to take money out. But, in these uncertain economic times, do they know how to save it? And do they know how to think long-term – beyond the weekend – about their finances? What about credit card debt? Or investing for the future?

The National Council on Economic Education (NCEE), a nationwide organization that serves to promote financial literacy with students and their teachers, has this to say on its website: “NCEE surveys show that nearly half of our young people don't understand how to save and invest for retirement, nor how to handle credit cards, don't know the difference between inflation and recession, nor how government spending affects them. If we fail to act now to improve economic literacy in this country, our children will be at risk for crippling personal debt, costly decisions at work and at home, and lack competitive skills in a fast-paced global economy.”

Robert Duvall, PhD, President and CEO of NCEE, says, “We know that the skills of managing your money well, are not skills that you’re born with. It’s learned behavior.” And according to many experts, the younger kids start learning about financial management, the better. Many schools now offer some form of financial-management class, particularly at the high school level. But parents are still their child’s first teacher, and can have a great influence on their child’s financial education. Paul Golden, a spokesperson for the National Endowment for Financial Education, a nonprofit foundation dedicated to improving the financial well-being of Americans, says “Teaching children good money sense must start in the home. Parents should invest time talking with their children about money and how to use it appropriately.”

So what can parents do to offer their kids some guidance on this issue and promote financial literacy at home? Here are a few tips.

Set a good example. Kids watch everything their parents do, and that includes how they manage their finances. Golden notes “[I]t’s important to remember that children will often mirror the behaviors of their parents. When parents set a good example, children will see how to apply money management basics, and will establish positive habits that will benefit them throughout their economic lifetime. Remember, it is never too late to set a good example.”

Start saving – at any age. As Dr. Duvall points out, “We have a negative savings rate in this country. That’s dangerous for individuals and for the nation.” A child who puts away part of their allowance each week to save for a new toy, or a teen who follows a longer-term savings plan for a car or college fund, is building a great habit of saving that will serve him or her well throughout life. Parents can get involved here and discuss short-term versus long-term savings goals, and help break down how much has to be saved each week to pay for a particular item. They can explain how interest earned on a savings account can benefit the child in the long-term. This is also an opportunity to discuss sharing and the principle of giving part of what they have to help others.

Budget sense. Talk about the family’s budget and how to keep track of expenses. The idea that a person’s living expenses should fit within their earnings can be a challenging one to grasp. Parents can help their children set up their own budgets, or even play "budget games" with younger kids. For example, “you have XX amount of money to spend at the restaurant today. Whatever you pick for lunch has to stay within that amount.”

Go shopping together. Shopping with your child is a great opportunity to talk about the relative prices of products and their value. Why does this bread cost $0.50 more than the other one? What does that extra $0.50 buy you? Is it worth it?

Make it a long-term conversation. Financial matters can get complex pretty quickly. But kids who learn basic principles of earning money and saving it, of what things cost and how to budget for their expenses, will be in a much better position as young adults to understand the more complex issues of mortgages, credit cards and interest rates. Parents who introduce their kids to solid financial principles early on are providing an important part of their children’s preparation for the "real world."